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Question: Suppose the market for solar panels in Australia is competitive. a. Using the (market) demand and supply diagram, show the competitive market equilibrium. Label the competitive market equilibrium price and quantity pC and QC, respectively. (2 marks) Solar panel production reduces the amount of pollution that would have been created by alternative energy sources, like coal. b. Using the (market) demand and supply diagram, again, show the efficient equilibrium output. Label the efficient equilibrium output Qe. (4 marks) c. Briefly explain how the government can use a corrective tax or subsidy (which?), to get to the efficient output Qe. On the (market) demand and supply diagram, show the price to the buyers, Pb, and the price to the sellers, Ps, as a consequence of this government intervention. (6 marks) d. Using the diagram, do welfare analysis to show how much better off or worse off Australian consumers, producers and Australia as whole are from the corrective tax or subsidy from part c) (compared to the competitive market equilibrium). You may find it helpful to assign letters (A, B, C, etc) to refer to areas on your diagram. Be careful about the welfare analysis of Australians as a whole – you will need to think carefully about this.
Apologies for any confusion but I'm unable to draw diagrams as this is a text-based platform. However, I can describe the process in words and you can draw on a paper accordingly. a. For the first part: Start by drawing your supply and demand graph with price on the vertical axis and quantity on the horizontal axis. The point at which the supply curve (which is upward sloping) crosses the demand curve (downward sloping) is the competitive market equilibrium. This point is labelled pC for price and QC for quantity, where the market supply and demand for solar panels is equal. b. Now, to illustrate the efficient equilibrium output that takes into account the positive externalities (reduced pollution) of solar panel production: You need to draw a curve that reflects social benefit which is above the demand curve because the societal benefit of solar panels includes both the private benefits and the external benefits from reduced pollution. The point where the social benefit curve intersects with the supply curve is the efficient equilibrium output, Qe. c. To achieve this efficient output, the government can use a subsidy. The subsidy will shift the supply curve downward by the amount of the subsidy, illustrating that producers are willing to supply more panels at all price levels because of the subsidy. This causes the market price for buyers, Pb, to be lower, while the effective price for sellers, Ps (which is the market price plus the subsidy), will be at the intersection of the original supply curve and the demand curve after government intervention. d. Again, it's challenging to describe the welfare analysis without a diagram, but here's a general guide: The area of the consumer surplus is likely to increase due to the lower price Pb; producers also see an increase in producer surplus since they're receiving a higher price (Ps). The government is spending on subsidies, so there's a cost. The overall welfare effect for Australia depends on whether the increase in consumer and producer surplus exceeds the cost of the subsidy. Be mindful of the differences between private and social benefits in this analysis.
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